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Impact Investment Opportunities in India for Catalytic Investors

India has a dynamic impact investing market, with many investors—from philanthropic foundations, to impact investors, to commercial investors—seeking to generate commercial, social, and environmental benefits from their investments. In addition, there are incubators, accelerators, networks, and advisory firms supporting both enterprises and investors, and facilitating deal flow.

On the surface, India’s impact investing ecosystem is thriving. There is high activity in the space, with deals happening across sectors and enterprise stages. At the same time, the narrative on impact investing has primarily been centered on capital supply and many investors in India have focused on achieving market-rate returns. This focus on returns left us wondering: are there areas currently not benefitting from this dynamic market, as they do not meet the investment criteria of most impact investors, but have the potential to create high impact?

To answer this question, we spoke with over twenty leading impact investors. We wanted to understand if there are market-based models that are not being supported by investors but which could represent attractive opportunities for investors seeking to create outsized impact or be catalytic. Focusing the research on three key sectors—financial inclusion, green tech, and health care—we found exciting opportunities across innovations, early-stage businesses, and models targeting some of the most vulnerable populations in India. This blog summarizes initial thoughts on such opportunities and seeks to paint a high-level picture of where they stand.

We recognize that the opportunities we share here are not mature. For the most part, they require an investment approach that most impact and commercial funds are not set up to offer, combining capital that is more flexible, risk-tolerant, and/or patient, with handholding and support. Such support could help these enterprises scale their impact, refine their approach, and potentially become the next wave of deals more traditional impact and commercial investors pursue.

Deepening the Financial Inclusion of Vulnerable Populations through NGO MFIs

We did not expect to find significant opportunities in financial inclusion. For many years, the sector has been the hotbed of impact investing, attracting significant capital from impact and commercial investors.

While access to credit—for individuals and small enterprises—continues to be a focus, investors are now also showing interest and investing in products and services in insurance, savings, and payments. Overall, the perception is that there is no dearth of capital for good opportunities. As one investor said, “Capital is not an issue; a good enterprise with a potentially scalable model and attractive commercials will find capital.”

However, even in credit provision, there are underserved vulnerable groups, for instance, migrant workers or populations living in hard-to-reach areas (like parts of the Northeast). There are smaller NGO microfinance institutions (MFIs) that help address the credit needs of some of these vulnerable populations and could represent attractive opportunities for investors seeking to deepen financial inclusion. One such NGO MFI, Shram Sarathi, works specifically with seasonal migrant communities. Located in Rajasthan, Gujarat, and Maharashtra, Shram Sarathi offers a suite of financial services, including home loans, loans to support income generation, and loans for health care.

NGO MFIs like Shram Sarathi are typically grassroots-oriented, and hence particularly effective to serve vulnerable populations. However, challenges in accessing affordable funding can limit their ability to serve their target populations/grow. Many of these NGO MFIs have been operational for some time and have robust credit processes—for instance, Shram Sarathi has 0.7% non-performing assets (NPAs) across its ~9,200 active loan clients and its INR 12Cr portfolio. However, they may be too small or local or have growth expectations that are too moderate, to interest more commercially-minded investors, while banks may perceive them as high-risk given the populations they serve.

Some of these entities may also need support beyond capital, for example, in establishing key operational processes relating to IT, HR, or regulatory compliance. Our interviews suggest that there could currently be 10-20 such NGO MFIs that have robust credit processes and could increase the reach of their services with affordable funding and handholding.

Leveraging Green Tech for Productive Use

The government’s push to increase renewables in the energy mix has led to significant investments in green energy in the utility space. The expansion of the grid in rural areas has reduced the relevance of, and market opportunities for, decentralized models such as mini-grids. However, even in villages that are considered “electrified,” some households are not connected to the grid and the quality and reliability of electricity continue to be an issue.

Investors we spoke with consider that commercial players who combine standard home solar solutions with credit are increasingly serving this market. But they think innovations around the productive use of solar solutions to enhance rural livelihoods provide an opportunity to create significant impact but face the greatest gap in investor support.

These productive-use innovations are being applied to a variety of value chains. For example, in agriculture, S4S Technologies has developed solar dryers for women microentrepreneurs to engage in vegetable-drying. In textile, Resham Sutra provides solar-powered silk spinning and reeling machines to women microentrepreneurs, increasing the efficiency and quality of silk yarn production. These approaches are particularly impactful, as they both provide a technological solution and a linkage to the value chain.

Despite showing some promise, productive-use models may still be too early-stage for most commercially-minded impact investors, as they are yet to be validated at scale. It will likely take time for these enterprises to refine their models and scale: they not only have to develop devices and build demand among microentrepreneurs, but also need to offer holistic solutions that are integrated into the value chain (e.g., by providing inputs to microentrepreneurs as well as market linkages to onsell their products). Though they may not fit the investment criteria of commercially-minded impact investors, they could represent attractive opportunities for impact-focused investors interested in helping establish early-stage models.

Innovative Approaches to Optimize Health Care Delivery for Low-Income Populations

Investments in health care have historically focused on traditional care, for example, in hospital chains, maternal health clinics, and set-ups combining pharmacies and primary care. According to the impact investors we interviewed, such investments have slowed due to challenges in making brick-and-mortar models financially sustainable. However, they believe there is a need and an opportunity to support innovations that go beyond typical brick-and-mortar models with the aim of providing quality private care for low-income populations.

One such approach has been the use of telemedicine to provide care by connecting trained doctors from urban areas with underserved or hard-to-reach patients. Telemedicine enterprises, like Karma Healthcare, optimize costs by sharing the cost of trained doctors across multiple points of care. To further improve its financial viability, Karma Healthcare also enters into cost-sharing partnerships, through which it uses existing facilities from local organizations to set up points of care. It now offers affordable quality primary health care in rural and semi-urban areas through a network of thirty telemedicine clinics in Rajasthan, Madhya Pradesh, and Haryana.

Beyond care provision, investors see innovations in health care devices to improve the quality and cost-effectiveness of health care provision as an interesting opportunity area. Low-income populations, while not the explicit target, will benefit from these. An example of one such company is Adiuvo, which has developed a non-invasive, portable device that can detect skin and soft tissue infections in wounds and cuts. The device can help reduce the risk of needing generic antibiotics prescribed and is less expensive than other existing products on the market.

In India, device development often benefits from the support of local incubators. However, turning hardware innovations into successful businesses is challenging. Such enterprises are often led by tech-focused entrepreneurs who may not have the ability to grow a business. More importantly, they need support to address the multiple risks and barriers they face to go to market and scale: they need to conduct clinical trials, obtain regulatory approvals, and develop their own distribution and sales channels.

Adiuvo is on track to deliver commercial returns with credible impact. However, like most device companies, its path from inception to profitability is likely to go beyond the target timeframes of most mainstream and impact funds, which limits funding flows. As such, there is a role for catalytic investors to provide investments and handholding to bring these models to the mainstream.

Investing with an Impact-First Lens

The models highlighted above represent opportunities to create deep impact, especially for vulnerable or underserved communities. They require an investment approach that is different from that adopted by most impact and commercial investors. Investors may need to provide capital that is more risk-tolerant, patient, or seeking lower returns. Some of these business models are early-stage—they need to be refined and do not offer much clarity on whether they will work at scale. To match the capital needs of some of these enterprises, investors might need to be flexible with the type and amount of capital they offer. Since these models are relatively untested, investors would need to undertake rigorous due diligence to ensure the intrinsic quality of the teams, enterprises, and business models before investing.

Investing in such models may require investors to go beyond offering capital and provide additional support to investees. Such support could be in the form of handholding and thought partnership to refine their business model, ensure regulatory and financial compliance, set up key processes, and so on.

Most importantly, investing in such opportunities requires a mindset shift. These investments provide an opportunity for investors to be catalytic. Beyond direct impact through the enterprises themselves, these investments can create market-level impact by drawing additional capital to these opportunity areas—whether it is by highlighting specific models that already exist but are not being supported, or by validating new models and attracting more mainstream capital.

While this blog outlines opportunities in three sectors, we believe there is an opportunity and need for investors to adopt such an investment approach in other sectors as well.

Sujata Rathi

Associate Director

Johan Thuard

Former Senior Consultant, FSG

Ashish Karamchandani

Senior Advisor